Commentary: Weak revenue gains will force federal spending cuts

The bill passed with so much drama converted the temporary George W. Bush-era tax cuts into the permanent Obama tax cuts. As hard as it may be to not extend tax cuts that are due to expire, it’s much harder politically to actually raise tax rates.

The tax rates, originally adopted in response to a surging government surplus and then extended to avoid fiscal contraction during a recession, have now been set at a permanently low level, which could hinder the country from achieving its future economic and social goals.

This was the thrust of the argument made by one of the 16 Democratic congressmen who voted against the bill.

“We have concretized revenue at an extraordinarily low rate,” Rep. Jim Moran said Wednesday on MSNBC.

Moran, who represents some of the Washington suburbs in northern Virginia, said the tax rates enshrined in the legislation now signed into law by President Barack Obama meant “we will never bring in more than 15% of GDP.” But, he added, the U.S. has never enjoyed a robust economy without government spending of at least 20% of gross domestic product.

Moran, beginning his 12th term in Congress this week, noted the deal’s immediate consequences of leaving several ugly fiscal battles to fight in the coming weeks — raising the debt ceiling, disarming the “sequester” of automatic spending cuts, and passing a budget that enables the government to continue operating.

But the real issue is the long-term problem of starving the beast, with Obama at his moment of maximum leverage getting only $620 billion in added tax revenue over 10 years — instead of the $1.6 trillion he sought in earlier proposals.

‘Good luck with that’

Fellow Virginia Rep. Bobby Scott, a Democrat who represents voters in Richmond, echoed Moran in explaining why he voted against the measure. Namely, the package failed to reduce the deficit, he said.

“It does, however, make the task of responsibly reducing our deficit all the more difficult,” Scott said in a statement, “and makes it much more likely that seniors, the disabled, students, and our most vulnerable communities will bear the greatest burden when Congress eventually pays for what we did today.”

Reuters

Vice President Joe Biden, a key player in the fiscal-cliff negotiations. (2011 file photo)

The White House tacticians seem to think that they will be able to pass a comprehensive tax reform to increase revenues at some later date. For now, they clearly felt that no deal that included the debt ceiling and sequester spending cuts could pass in time to avoid the fiscal cliff, electing instead to fight those battles another day.

What worries the Democrats who voted against the bill is that having won only a watered-down tax hike on the very highest incomes, the president has given up his leverage in these other crucial fights.

Obama’s repeated declaration, for instance, that he won't debate the debt-ceiling issue again leaves many in his own party openly skeptical.

For one thing, his equally forceful declarations during the 2012 presidential campaign that those earning over $250,000 would see their tax rates go up faded quickly, even though he won a second term as polls showed a majority of voters agreeing with that pledge.

For another, it is hardly an issue he can avoid. As Moran said when asked about Obama’s reiteration this week of his pledge not to debate the debt ceiling, “Good luck with that.”

Tax rise spurs Goldman stock award

(4:10)

Goldman Sachs handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year's higher tax rates took effect. (Photo: AP.)

Leaving aside dubious solutions like the platinum coin worth a trillion dollars or citing the 14th amendment to preserve the nation’s credit-worthiness to continue borrowing without congressional approval, the only real option left to the executive in a debt-ceiling standoff is to shut down the government, which would arguably be more disruptive to the economy than the fiscal cliff would have been.

In short, the feeling is that the president is bluffing and that the Republicans won't hesitate to call that bluff.

Obama’s move sending Vice President Joe Biden into the fiscal-cliff talks to make more concessions after Senate Majority Leader Harry Reid (D., Nev.) refused to budge any further has no doubt reinforced the GOP’s belief that such a bluff can be called.

So there’s no end in sight to the brinkmanship in Washington, with the consequences it bears for the U.S. economy, the nation’s credit rating, and the real harm it inflicts on the public.

It’s a sad state of affairs for a nation that still boasts the biggest economy in the world and has the resources that will enable it to maintain a top status well into this century.

Perhaps the constant turmoil in Washington will clarify issues for voters by the midterm congressional elections in 2014, and we can decide as a nation to maintain the kind of fair and just 21st-century society that other industrial countries manage by paying slightly higher taxes to support the government services needed to do so.

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